Muddy Waters Fails to Shake American Tower With Short Bet

Carson Block, founder of Muddy Waters LLC, speaks during a Bloomberg Television interview in New York on July 17, 2013. Photographer: Peter Foley/Bloomberg

July 18 (Bloomberg) -- Never before has the unveiling of a
Carson Block short sale done less to sway investors.

American Tower Corp. fell 1.1 percent to $73.87 yesterday,
the smallest first-day drop ever in a stock after a report from
Muddy Waters Research, which built its reputation with bearish
calls on Asian companies. New Oriental Education & Technology
Group Inc., Focus Media Holding Ltd. and Sino-Forest Corp. lost
at least 20 percent after previous Muddy Waters notes.

Investors in the operator of cell-phone antennas were
unshaken by Block’s analysis and firms from Wells Fargo & Co. to
Macquarie Group Ltd. said they disagreed. Block said yesterday
that American Tower is worth 40 percent less than its share
price because it overstated the value of its acquisitions and
has poor corporate governance.

“The market is sometimes a lot smarter,” William Ferer,
who manages about $3 billion, including American Tower shares,
at W.H. Reaves & Co. in Jersey City, New Jersey, said in a phone
interview. “I took it quite positively that after a full day of
digesting this Muddy Waters report the stock was only down a
little bit.”

The shares rose 1.5 percent to $74.95 at 10:13 a.m. in New
York today, erasing yesterday’s loss.

Wireless Towers

American Tower, the second-biggest U.S. REIT by market
value, owned or leased 22,599 wireless and broadcast
communication towers in the U.S. and 33,074 towers
internationally as of March 31, according to its most recent
quarterly filing. Matt Peterson, a spokesman for the real-estate
investment trust, didn’t respond to messages seeking comment.
The Boston-based firm has a market value of $29.2 billion, data
compiled by Bloomberg show.

About 26.3 million shares of the company changed hands
yesterday, the most in five years, Bloomberg data show. More
than 171,000 put options traded, about 90 times the average for
2013 through last week.

“This stock should be mid-40s,” Block said in a Bloomberg
Television interview yesterday. “Our goal with this report was
for people to actually read it and I think people are reading it
and after they read it, digest it and the company responds, I’m
feeling very good about it.”

This is the first time Block has targeted a U.S. company.
The 37-year-old investor gained fame for his short-selling calls
in Asia after regulators halted trading in four of the first
five companies he targeted starting in June 2010. Hedge fund
manager John Paulson sold his Sino-Forest Corp. stake at a loss
after Block said the company overstated its plantation assets.
Sino-Forest filed for bankruptcy protection in 2012.

Little Impact

American Tower shares have more than tripled since November
2008. The stock trades at 25.8 times funds from operations,
compared with a multiple of 19.8 for Simon Property Group Inc.,
the largest U.S. REIT by market value.

“I don’t think I’ve ever seen a Muddy Waters report having
this little an impact on the market,” Ophir Gottlieb, managing
director at San Francisco-based Livevol Inc., a provider of
options-market analytics, said by phone yesterday. “It just
wasn’t that big of a deal.”

Hedging by people who owned the stock may explain why the
shares didn’t fall more after put trading surged, Gottlieb said.
In the two days before the report, more than 40,000 bearish
contracts changed hands each day, compared with a historical
average of 1,900, according to data compiled by Bloomberg. The
shares slid 4 percent from July 15 to 16.

$250 Million

There is about a $250 million discrepancy between the price
American Tower said it paid for towers in Brazil and the actual
sale price, the Muddy Waters report said, citing research from
financial statements of the companies acquired, Brazil’s central
bank and six industry sources.

American Tower rejected Block’s assertion that it paid
around $300 million for the Brazilian communication sites,
according to a filing released after the close of trading
yesterday. The company said the price was about $585 million for
the towers, financed by intercompany loans, cash from operations
and equity contributions.

American Tower’s management shows a “lack of faith” in
the company’s stock price, Block said in his report, citing
share sales from exercised options. The company also faces weak
growth overseas, such as India, Ghana and Brazil, according to
the note.

“When we have gone into the field and actually rolled up
our sleeves and figured out what is going on in many of these
emerging markets, the reality is actually very different from
what the company tells you,” Block said yesterday. “The way
that this business is working overseas, it’s just not going to
work as well as it has in the U.S.”

Pedestrian, Foolish

Muddy Waters failed to identify any new challenges facing
American Tower, according to Andrew Hamerling, managing partner
of Wavelength Asset Management, a New York-based hedge fund.

“This report was pedestrian and foolish,” said Hamerling.
American Tower is one of the largest holdings in the Wavelength
Asset Management fund, he said. “The emerging market risks were
always there, and the company had done an admirable job managing
those risks and returning value to shareholders.”

Wells Fargo’s Jennifer Fritzsche said she disagreed with
Block’s contention that the business faces a major threat from
Wi-Fi because data demand is growing, according to a note
published yesterday. Investors should buy shares of this “high-class” company, Macquarie’s Kevin Smithen said in a report.

The stock has 19 buy ratings, five holds and one sell,
according to analyst recommendations compiled by Bloomberg. The
shares are down 4.4 percent in 2013.

Real estate investment trusts, whose primary income streams
are from properties, don’t pay federal income taxes. In
exchange, they’re required by the Internal Revenue Service to
distribute at least 90 percent of their taxable earnings to
shareholders in the form of dividends.